Kodak blows itself up in hopes of surviving

Kodak

David Duprey/The Associated Press

Kodak headquarters is shown in Rochester, N.Y., 2011. Survival of the company that invented film photography for the masses and technology for mobile phone photography is far less certain as it transforms itself into part of the commercial printing and packaging industry.

ROCHESTER, N.Y. - All those photos you shot years ago on film and stuck in a scrapbook or shoebox theoretically will last for centuries.

The phrase “Kodak moment” may survive for years to come as part of pop culture.

But Kodak itself?

Survival of the company that invented film photography for the masses and technology for mobile phone photography is far less certain as it transforms itself into part of the commercial printing and packaging industry.

The likelihood Kodak will get through its ongoing Chapter 11 bankruptcy rises almost daily. Eleven months in, Kodak has secured an $830 million line of credit from various lenders—money that is supposed to carry it through the rest of its bankruptcy and out the other side.

And the company continues to maintain it will come out of bankruptcy sometime in the first half of next year as a pruned-down but finally profitable company.

That post-bankruptcy Kodak will barely resemble the company that filed for bankruptcy protection in January. Desktop inkjet printer manufacturing will stop next year though the company will continue to make the inks. Kodak expects to save $100 million next year by ending all the retiree health benefits it long has provided. And the company estimates it has shed roughly 3,700 positions worldwide this year, or roughly 1 in 5 workers, including numerous middle and upper managers alongside hourly workers.

But perhaps most momentously, Kodak will be out of the photography business.

The digital camera business has been shut down. The photographic-paper and still-camera film businesses are for sale alongside the document-scanner and photo-kiosk operations.

The heavy lifting is not getting out of bankruptcy, but the months and years afterward.

“The major question is the longevity,” said Art Roberts, president of Kodak retiree group EKRA Ltd. “There’s probably enough confidence in the 12- to 24-month window, but is there technology to carry that into the future? I don’t know.”

The future

If Kodak has a fan, it’s John Place.

The chief executive of Mercury Print Productions here, Place had a Kodak Prosper 5000 digital printing press installed last year. He expects to have a Prosper 1000 installed within a couple of weeks and looks to buy another Prosper 5000 some time next year.

“They have the best technology,” Place said. “But Kodak has always been bad at marketing.”

“My opinion is, (Kodak) is going to be successful,” Place said. “And we’re going to help them be successful.”

After decades of generating Midas-like fortunes by putting light-sensitive chemicals on plastic strips, Kodak sees its next life revolving around a similar deposition process—this time in printing. Specifically, Kodak is looking to commercial printing, packaging printing and print industry services—as well as the just-emerging field of functional printing—to be its next life.

The choice has not been happenstance.

The thought process started back in the mid-2000s, said Christopher Payne, vice president of Kodak’s business-to-business marketing, when Kodak began acquiring a variety of print-related businesses, spending hundreds of millions of dollars on such firms as NexPress and Scitex.

Kodak’s entry to the packaging world is more recent, with its introduction of the Flexcel NX printing system in 2008. And functional printing—using printing technology as a means of manufacturing such goods as circuit boards or solar cells—is itself in its infancy.

Today, print “is the only business they have that they could emerge from bankruptcy with and have a hope of succeeding,” said Tone Kelly of Webster, N.Y. He retired in 2007 after 34 years with the company, most of it in corporate strategy.

The high-speed inkjet Prosper system “is a breakthrough technology,” Kelly said. “If they get that going, ... it’ll be a real opportunity.”

Packaging printer Hammer Packaging in Henrietta, N.Y., has been a user of Kodak pre-press offerings such as plates before and through the bankruptcy.

“Everything’s been on time,” Chief Executive James Hammer said. “They’ve got good products. The credibility is still there.”

But whether Kodak can make a big splash in packaging printing will depend on it being able to offer technology and products that set it apart from the competition—akin to its inkjet technology in commercial printing, Hammer said.

Kodak has a Feb. 28 deadline for its plan to repay creditors and exit bankruptcy. The plan has to be approved by U.S. Bankruptcy Court.

The plan itself, even if Kodak’s creditors sign on to it, “does not necessarily mean that the parties believe that a company will succeed, just that there is some possibility and it is the best deal they can get at the time and better than an orderly liquidation,” said John C. Ninfo II, a retired U.S. bankruptcy judge for the Western District of New York.

Yet now arguably is not the best time to bet the farm on printing. While it’s a growing industry in much of the developing world, commercial printing is on the decline in the United States, according to quarterly Census Bureau economic statistics.

Another of western New York’s traditionally dominant companies, Xerox Corp., has made a major bet on business services as its printing equipment business growth has slowed to a crawl.

Alternate reality

The difference, according to Kodak, is its printing technology, with its high-speed inkjet Stream technology putting it on the path to a sort of holy grail in the print world—the speed and image quality of offset printing but the ability to do short press runs or personalization that comes with digital.

However, Kodak has a history of great technology that it never could translate into big bucks. Think organic light-emitting diodes. Think digital photography.

As the end of silver halide photography became evident, Kodak had a history of throwing lots of spaghetti at walls to see what might stick, from digital photography to pharmaceuticals.

“Kodak’s biggest problem was its success,” said Art Roberts of the retiree group EKRA. “The film business was so profitable that every other technology was a second cousin through the years.”

Kodak’s bankruptcy likely would have gone very differently if the company had been able to more quickly or more lucratively turn its digital imaging patents into cash.

The company went into bankruptcy in part for the U.S. Bankruptcy Court protections that would come with such a sale. And while a Kodak-hired consultant had put a potential value of $2.4 billion on the patents, Kodak last week announced it had signed a tentative deal to let them go for $525 million.

While the company’s objectives during bankruptcy reorganization—such as sell the patents and cut retiree benefit costs—remained unchanged during the past 11 months, “we have had to make some difficult decisions throughout the reorganization based on the realities of what is required to emerge,” Kodak spokesman Christopher Veronda said.

Kodak’s management “made a lot of wise decisions to go to Chapter 11 - they had so much baggage in terms of the pension plans, so much dead weight,” said Chief Executive Alexander Poltorak of General Patent Corp., a Rockland County, N.Y., intellectual property services firm. “They had to shake it off.”

While the patent sale also probably was the right decision, Poltorak said: “The patents could’ve been sold a long time ago. That was a big mistake.”

‘UnKodak’ emerges

Kodak has a number of backers banking on it having a viable future. A number of financial institutions and hedge funds are floating the company $830 million in financing.

While bankruptcies usually wipe out shareholders’ stock, leaving them with worthless paper as new shares get issued, Kodak’s shareholders potentially could see some returns, said Ken Luskin of Intrinsic Value Asset Management Inc.

“At this point, it’s what are you going to get for (the photo kiosk and document scanner businesses)? How much can you knock down (the U.K. pension obligation)? If they can get decent valuations, there’s equity left over for shareholders,” he said.

At the same time, there’s plenty of pessimism in the investment community.

The average price of a share of Kodak stock this year? Around 27 cents. And credit rating firms like Moody’s, Standard & Poor’s and Fitch today don’t even bother giving a grade to Kodak’s corporate debt.

There’s also an argument to be made that Kodak has nothing of value.

Retired company Vice President Terrence Faulkner, in a letter to U.S. Bankruptcy Court early this year, argued that Kodak likely would fail not long after coming out of bankruptcy, given the challenges of competing in desktop inkjet and the slide of other product lines such as photo paper and motion picture film.

Today, he said, “a Kodak that has exited film, digital cameras, inkjet and spun off health is no longer Kodak.”

Those moves, plus the sale of the digital imaging patent portfolio, will leave “a very different and much smaller company,” Faulkner said. Meanwhile, Kodak’s remaining businesses will face competitors “larger than the emergent UnKodak and better funded.

“UnKodak is struggling to emerge from Chapter 11 at a time when businesses are very hesitant to make investment in new equipment,” Faulkner said.

EKRA, the retiree group, estimates that unsecured creditors will get back 10 cents to 20 cents on the dollar, making it highly unlikely shareholders would see their shares survive.

“The strategy moving forward still makes sense,” said Jim Weaver of Irondequoit, N.Y., who retired from Kodak earlier this year after spending most of his career in R&D and commercialization. “But it’s not a slam dunk. ... The path forward, it’s not like we’re in a cash cow business anymore. These are going to be challenging businesses, without a doubt.”